Decisions — What’s the connection?

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Unless specifically excluded, ordinary and necessary expenses incurred in connection with carrying on a business are generally deductible under federal income tax law. One of those specific exclusions are expenses in connection with certain lobbying, political campaigns, and attempts to influence legislation (see internal revenue code section 162(e)).

What exactly does “in connection with” mean? In a broad sense, the term could mean an association or relation with, not necessarily directly related. In a more narrow sense, the term could mean requiring one action to be a prerequisite of another.

In Private Letter Ruling 201616002, the question was whether a corporation’s charity match program created charitable deductions or nondeductible political expenses.

The taxpayer, a corporation, was prohibited by the Federal Election Campaign Act from contributing to federal election campaigns. The taxpayer established Political Action Committee (PAC), which was funded by the employees of the taxpayer. The purpose of the PAC was to “disburse funds to candidates” for public office, as chosen by the PAC.

To encourage employees to make contributions to the PAC, the taxpayer matched each contribution with a contribution in the name of the employee to one or more charities selected by the employee.

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We conclude that the taxpayer’s matching contributions are “in connection with” a political campaign on behalf of a candidate for public office and are not deductible under section 162.

Section 162 of the internal revenue code allows a taxpayer to deduct all of the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

“Ordinary” has been defined to mean “frequent” or “common” in the context of the particular business. “Necessary” has been defined to mean “appropriate and helpful.”

Regardless of whether such expenses are “ordinary” and “necessary,” deductions for expenses made to political campaigns have long been prohibited. Congress expanded this prohibition to disallow a deduction of amounts paid or incurred in connection with a political campaign.

Under current section 162(e)(1)(B), amounts paid or incurred in connection with participation in, or intervention in, any political campaign on behalf of (or in opposition to) any candidate for public office are not deductible under section 162. Treasury regulation section 1.162-20(c) further states that, while certain types of expenses with respect to legislative matters may be deductible, other expenditures, including those “for political campaign purposes,” are not deductible from gross income.

Courts generally have read the phrase “in connection with” as it appears in the code broadly.

Here, the contributions to the PAC and the taxpayer’s matching contributions are inextricably linked. The contributions to the PAC are a prerequisite for the taxpayer’s matching contributions. Moreover, the taxpayer’s matching contributions are intended to incentivize contributions to the PAC. Applying section 162(e)(1)(B), the regulations, and case law, we conclude that the taxpayer’s matching contributions are “in connection with” a political campaign on behalf of a candidate for public office and are not deductible under section 162.